"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, March 20, 2014

Easing Ukranian Tensions, Hawkish Fed, undercut Gold

Take a look at the following comparison chart of the price of gold ( IN BLUE ) versus the Volatility Index, or as I prefer to call it, the Complacency Index ( IN RED ). By the way, this is a 2 hour chart.

The VIX measures investor nervousness, lack of confidence, fear, panic or complacency, comfort, ease, confidence. When it is rising, investors are nervous; when it is falling, they are confident.

With that in mind, observe how the VIX spiked higher as tensions began building over in Ukraine as that came onto the radar screens of traders/investors. The more the hype ramped up about WWIII, new Cold War, etc., the more nervous traders became. As the VIX soared higher, gold followed up right along with it as its safe haven status came into play.

Additionally, the US Dollar refused to get any sort of safe haven bid during the crisis, further aiding the upward path of the gold price.

Notice however, that as soon as the VIX moved lower, so too did gold. Simply put, markets that move up on geopolitical events tend to come down just as fast once traders digest the news and the worse possible outcome does not come to fruition.

As the VIX moved lower and investors began to look at the Western sanctions, they realized how insignificant those were going to be and the extremely limited impact it would make on markets worldwide and they began moving back into stocks as nervousness faded.

Yesterday the Fed came out with what were generally interpreted as hawkish comments. Traders were caught off guard by Fed Chair Yellen's comments that interest rates would be going up sooner than expected. The current view, now that the Fed has made its announcement and Yellen has answered questions, is that the bond buying program ( QE) will end this fall and interest rates will possibly move higher 6 months later. Effectively, next spring will see higher yields is how the market is viewing the Fed's new standing.

With no inflation in sight as far as the market ( and the Fed ) is concerned, traders are moving out of gold. Adding to that is the fact that concerns over China's economic growth are mounting. This is putting pressure on some key commodity markets, notably copper and that is working to take some of the buying out of the sector.

An additional headwind for gold is the strengthening Dollar. With the Fed talking higher interest rates, the greenback is drawing support at the expense of the European currencies in particular, as well as the commodity currencies, such as the Canadian and Australian Dollar.

As long as there is the potential for further flare ups or escalation of tensions in Ukraine and in Crimea, traders might be hesitant to remove the total " WAR" premium out of the gold price. They seem to have just about removed it all at this point but it is holding above $1320 for now. That is the zone that they needed to hold in order to maintain control of this market on the daily chart. So far, they are still hanging in there. It looks to me like the buying in the mining shares is offering some support to the actual metals at the Comex.

Silver by the way, is once again flirting with being a teenager. Copper continues to act as an anchor on the grey metal.

The Dollar has generated a buy signal on several of the daily charts. Gold holding support therefore must be a bit encouraging to the bulls but I want to stress this again - this must hold or they will cede control back to the bears and set up a likely test at $1305 - $1300.

Lastly, take a look at the Goldman Sachs Commodity Index, the daily chart. It had managed an upside breakout recently but has since surrendered those gains and is now trading back below its former breakout point which seems to once again be acting as overhead resistance to the sector as a whole. There remain individual commodity markets which are still showing signs of strength but we are trying to see the sector as a whole to gauge whether or not there is a general bid into this asset class. With the US Dollar strengthening once again, my guess is that some of the hot money from index funds that was blindly buying across the sector will be forced to be much more choosy.


  1. Chipotle closes at $611

    I guess burritos will be the next "reserve currency", LOL!!!

    By the way, Palladium looks really good, so does Stillwater Mining. Both pricing in an unprecedented boom in auto sales for those catalytic converters.

    And Charles Schwab is making new highs, no doubt Joe Six is starting to step his foot in the pool now, after sitting in cash the last 5 years. No way he's going to part with his money at the coin dealer, too much risk of Uncle Sam taking it away some day.

    1. huge reversal on lackluster volume in a very thin mkt is all you saw today in palladium; more importantly, the big brother platinum looks weak on the daily and weekly charts; fade rallies; sparks

    2. Chipotle Minsk located in the urban-reuse site of the old Soviet era vacuum tube factory. Da!

  2. Dan,
    I've been reading your blog for a while now and just wanted to say thank you for all your hard work, sharing your opinions and experience freely and with no other agenda than to spread knowledge is a noble habit.

    Bless you and your family,
    all the best,

  3. Dan:

    You and I should stop being gold technicians and just follow bank stocks instead.

    Imagine the glory and the ease with which to follow a sector which as the full, faith, backing, and sponsorship by the Fed and TPTB.

    Bloomberg announced that 29 of 30 banks passed the new stress test, with Zions Bank the the only one that failed.

    Sure pays to stay in the system when the government has your back.

    Maybe all gold mining companies should be required to pass a stress test against:

    - Deflation
    - Fed jawboning
    - Tapering
    - Sudden ore downgrades
    - Nationalization

    My bet is that 29 out of 30 of these top mining companies would FAIL.

  4. A bubble deflated Chinese hard landing promises significant global market turbulence ahead.
    I guess were going to find out how highly levered the Chinese market is in derivatives and swaps etc. The US taper off QE is slowly sucking dry the easy QE money spigot the emerging markets were flooded with.
    China is quickly starting to show cracks in it's shadowy markets and I think if the US were to quickly and irresponsibly end all of QE next month in one fell swoop it would be a real blow felt by China and others.
    Naturally, that one month hard brakes scenario on QE will never happen but I think some economies became very reliant on massive QE monthly capital infusions to continue at the pace they were at their peak.
    And in some way that has made them vulnerable to the Fed's taper or whatever language the Fed starts to use moving forward. Just imagine if Yellen merely commented that the Fed was considering closing it's Swaps Window operations abroad.
    In a world where a financial war of words and actions is JUST STARTING to become the weapons of choice between govts. it seems a strongly worded or implied Fed comment could wreak havoc on some countries who are teetering.
    China and Russia fit that profile and they could also push back with words or actions financially whether real or implied that might or might not damage the US or USD meaningfully.

    But if they try to dislodge the USD internationally and FAIL to do so in a significant way they'll have made a very bad historical calculation in my opinion. Especially so when China and Russia seem economically vulnerable from a market standpoint.
    If the USD were to strengthen significantly while the yuan (and ruble) weakened dramatically vs the USD it would probably be enough to significantly hurt both their economies. IF the US wanted to inflict some real economic turbulence on China and Russia all it has to do is direct the Fed to talk irresponsibly aggressive about tightening policy.

    A war of word$ is where we're at and anything seems possible with the ego's involved. The $takes are high.

  5. Meanwhile the cost for the next q and a in hongkong is up to 150 dollar. Jims done selling his trx shares but not done with herding pensioners out their pension into a disaster.

    1. Jasper, that is sad; have you ever been to one of his deals? sparks

    2. I think it was all about Cyprus. He read from that event that it will be a normal occurrence from now on. But it may just be a one time event, and there is nothing that can be gleamed from it.

    3. I was in london early 2013. Paid 50 dollar then. I saw a larger then life ego and a couple hunderd sheep worrying they will lose their pensions.

  6. now kwn is using Templeton's opinion on the yuan/rmb, made many years ago and it was bullish. very lame, kwn, as John died some 6 years ago and if that is not grasping at straws, I do not know what is. how many others long since passed can we look to for further future guidance? sparks

    1. Steve. I look at KWN b/c there is some wheat in there w/ the chaff. I scoff a bit less at the Templeton comment b/c it was from Jeff Saut who is not at all a pumper. First, he went bullish in equities in 2011 citing both technicals and real improvements in the economy, especially the consumer. See link below.

      2nd, he was cautious on gold in Sept 2011, advising to sell off a portion of gold then + then further saying in fall 2012 that gold's correction had a ways to run (2nd link below).



    2. Further apology for Saut. He didn't make the headline. It's part of his argument that China will endure current currency devaluation + defaults. Reasonable enough. Also, if you look at the six (Templeton's last words) year USD - Renminbi chart, $ has depreciated about 12% against the people's money. Few currencies have performed that well.
      The renmin have spoken.

  7. what would you guys do without kwn … its hilarious … totally monty python...

    1. "Monty Python" - that is it.

      Only other explanation I have for it is it's like wrestling, people know it's fake but still watch it for entertainment value to spice up an otherwise boring life.

      Or better yet it's like Peter Popoff Ministries, it's a total proven con but people love sensationalism, and depends on a steady stream of newbie suckers.

  8. Looks like the bulls are maintaining control, at least during tonight's trading, with gold pushing near 1335 an ounce, having bounced off chart support at 1320 as Dan highlighted. That +DMI needs to hold above -DMI for bullish sentiment to stay the course though. My guess however is that we will retest the congestion zone on the chart between 1340 and 1350, and possibly stall out there, especially if the bears can flex some muscle and get that -DMI to cross over. This of course assumes that complacency prevails, and the Ukraine situation is dismissed for the time being by traders as much ado about nothing.

    What continues to fascinate me about the markets is how quickly underlying securities collapse in price versus how long it takes them to rise. I know that we mostly concentrate on commodities and the metals especially here on Dan's blog but this phenomena is most certainly not exclusive to gold. Just take a look at any number of big board stocks that were hyped up and go through steep rises only to erase a week or two of gains in the span of one or two trading sessions. TWTR back in December, or most recently PLUG, are just some examples on the equity side.

    Just bringing this up to give some perspective - like Dan always say, you've got to be able to recognize the cycles and when bullish and bearish sentiment prevail; not being married to any one side is a sure way of profiting in the markets in the long run via a disciplined approach to trading.

  9. I think the problem with the Chinese economy is those damn people just save too much! When they learn to save in burritos and experience the joys of unconstrained consumption they too can have a real economy like the US.

  10. Hi all,

    Not able to attend the blog since a few days and probably the whole next week.
    My positions on the market are also close to zero : too busy.
    I'm posting though a small chart about copper, as I'm watching a signal which I'm using in this kind of configuration :


    - both Bollinger bands are going down : "phase 3", bear trend
    - one of my indicators is going above its max of volatility. Usually, when this indicator reverses down, it anticipates the reversal of the Bol Inf of 3 to 4 candles...i.e it tells me that the Bol Inf may probably soon become an upwards support to prices.
    So, let's see...I may go long on Copper soon, paradoxically, and though copper seems to rather be breaking through major support areas.
    Have a nice day,

  11. Terrifying nightmare for gloom and doomer types continues.

    Bank stocks everywhere are breaking out to 5 and 6-year highs, including JPM aka "The Derivatives Colossus".

    Never before in world history has paper pushing and paper shuffling been so profitable, with interest rates crushed at 45-year lows for 6 years running now.

    Which means that the economic boom that follows will be one for the record books.

    Check out the massive u-turn in FXI this morning, I'm sure right now is a decade buying opportunity for FXI and RSX, anyone loading up on those will probably be able to retire in 5 years.

    Stay in the system, 20% haircut is getting more of a remote possibility every day, especially since the bank stocks are all breaking out to multi-year highs.

    1. 20%+ haircut is not a remote possibility or probability. It is a certainty. The only question is when. The basic laws of thermodynamics apply to the study of Economics too, albeit not as evident as in the nature.

  12. Hey Sparks, as I predicted, Palladium is breaking out of 3-year flag pattern.

    Go to Kitco and check out 5-year chart.

    Measured move off that flag means $1,700 to $1,800

    1. Mark, the break-out does not come until '11 highs of $850 are blown out; sparks

  13. Sparks ETF PALL high print today was $77.46 which was over Feb. 2013 high of $77.20. If it keep going then shorts are going to be in a world of pain.

    I expect automobiles to start flying off dealer showroom floors later this year as Yellen will probably recommend cash for clunkers or something to help little guy get back on his feet.

    All I can say is that somebody knows something, LOL....

    1. Mark, am I missing something, because what I read is that most of the action in cars is in the deadbeat subprime area, no? You may be right on your etf call, so we have to wait and see; I do not trade thin mkts like this, but I watch; all I know is that platinum should be more than $100 higher than gold if the pm's were any good and I do not think they are, for the time being; sparks

  14. This comment has been removed by the author.

    1. Anon, it matters to Sprott, but not to Sparks

  15. From ZH … Golden Cross Completed . Is it relevant to you , or is it something you don't pay much attention

  16. GDX/GLD ratio crumbling again, set to close at the lows of the week.

    "But any minute now, I swear!!!!........."


  17. Friday Featured Interviews; Dines, Cashin, and our favorite Maguirre. It does not get any worse than this; have a good weekend everyone; sparks

  18. Steve,

    Yeah, same old guys who are ill-equipped to deal with today's Robo/Algo/ Igor HFT world. Those poor guys trying to explain what is happening with the market is like Art Cashin attempting to play one on one with LeBron James.

    They are way behind the times, still clutching to old Austrian economic paradigms which have been invalidated for years now. And as far as manipulation, its been happening for years now, but manipulators power now way too small to stack up against the HFT Algo Robots who trade millions of share per second.

    If gold plunges by $75 in one day, its some Algo going berzerk, not "The Central Planners", lol...

  19. Mark, exactly right; Mkts r irrevocably broken and everything has changed; I do not know if it is a good thing, but I suspect not, but maybe that is just showing my age; mkts have no connection with main street realities; have a good wknd; sparks

  20. Your blog is nice and tel me more on the Complacency Index.
    Futures Trading in Commodities


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